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If you’re in the market for a major purchase like a new car, or need some extra cash to fund a personal project, taking out a loan could be your best bet.

Personal loans and car loans represent two of the most common financing options. Assuming you meet their respective lending requirements, they can be relatively easy to obtain. These days, most lenders accept online applications for personal loans, and car loans are generally approved on the spot at the car dealership.
So what’s the difference between the two? A personal loan can be used for many different purposes, whereas a car loan (as the name implies) is strictly for the purpose of purchasing a vehicle. If you want to borrow money for a car, you could simply take out a car loan, but if you require funding for a purpose that’s less specific or falls outside the typical lending box (such as a vacation, wedding or home improvement), a personal loan provides more flexibility.
A car loan is secured against the vehicle you intend to purchase, which means the vehicle serves as collateral for the loan. If you default on your repayments, the lender can seize the auto. The loan is paid off in fixed installments over the period of the loan. Much like a mortgage, the lender retains ownership over the asset until the final payment is made.

Interest Rates

Given that the lender has financial control over the car – it's a “secured” loan – the debt is deemed lower risk, which generally translates to a significantly reduced interest rate for the borrower. Interests rates are also fixed, so borrowers are not subjected to the increases that can be associated with unsecured personal loans.

The Terms

Most car loans are fixed at 36, 48 or 60 months. And just like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A less-than-average credit history won’t necessarily stand between you and your car loan (unlike a personal loan), and it will have less impact on your interest rate or borrowing amount (which is dictated by the price of the car). Before signing up for a dealer loan, it can be worth investigating whether a local bank or credit union can give you a better deal.

An auto loan helps you buy a car that costs more than you can afford with cash. Unless you have a substantial amount in savings, you’ll probably borrow and pay off your vehicle with flat monthly payments.

If you borrow wisely, you enjoy two important benefits:

1. You’ll spend less (perhaps thousands of dollars less) on your vehicle

2. You’ll have the flexibility to change vehicles and fund other goals within a few short years